Loans in Nigeria are known to come with fixed interests so how much does a 1% in your payday loan rate matter?
A source of quick cash, a payday loan is a short-term loan that is tied to your next paycheque. The concept of a payday loan is that you take it out when you need to cash, and then you pay back the entire loan on your next payday.
Payday loans used to come with high-interest rates, but the emergence of fintech companies changed the landscape of how lenders offered loans in Nigeria.
The fintech companies were able to disburse loans in minutes with no paperwork or guarantor with the help of mobile technology.
This led to exponential growth in the credit industry with the Credit Bureau of Nigeria and the administration of Bank Verification Number (BVN) playing significant roles respectively. See how to check BVN if you no longer have your details.
This in turn reduced the interest rates payday loans attract with some lending platforms reducing it to as low as 1%.
Fixed vs variable interests
If you’re considering getting a payday loan, the first question that pops into your mind is; are payday loans fixed or variable?
There can be fixed or variable-rate loans, depending on whether the interest rate is set at the beginning of the loan or varies throughout its term. The difference between fixed and variable-rate loans can significantly impact how much you pay in interest over the life of your loan.
Fixed interest is when a lender agrees to charge you a set monthly amount for a predetermined period. With fixed-interest loans, you know how much you’ll need to pay monthly for your loan.
Payday loan rates are fixed. The interest rate stays the same over the entire term of the loan, 14 days or one month.
A variable rate loan, on the other hand, is one where the interest rate can adjust based on market conditions. These variable loans typically have a fixed repayment schedule, at the end of which the borrower must decide whether to renew the loan at its current rate or shop around for another.
A variable-rate loan could be ideal for your needs if you have plans to change your monthly payment in the future or if you have other expenses that may increase or decrease over time.
How do payday loans work?
As explained, payday loans in Nigeria are short-term loans designed to help people cover their bills until their next paycheck. Usually, the loan provider makes the direct deposit of the loan amount into the borrower’s bank account.
People can repay their payday loan debt with a single payment. On the next payday, the loan provider will withdraw the loan amount and its interest rates from your bank account.
With payday loans, the longer your loan, the lower your monthly payments will be because your interest rate will be less than what it would have been on a shorter-term loan.
This, however, ends up being more expensive when you calculate the total figure You may also take out another cash advance without penalty.
How to qualify for a payday loan?
Payday loans tend to have lower eligibility requirements. For example, you can qualify for a payday cash loan if you have a steady job and a bank account. You’ll also need to show proof of employment and your ID card to prove your age and residence.
Some of the basic requirements for payday loans include;
- Be at least 18 years old
- Have an active checking account
- Provide some proof of income
- Provide valid identification
- Provide proof of residence
Payday loans can be approved in as few as 15 minutes. In the past, borrowers were required to write a post-dated cheque for the loan amount plus a lending fee, and the lender holds onto the check until a predetermined due date.
These days, the process has been digitised so that the borrower grants the lender access to their account to make automatic deductions.
Most payday loans are extended for just a few weeks. When the loan comes due, the borrower either pays off the loan or allows the lender to cash the post-dated check or otherwise make a withdrawal from the borrower’s account.
Facts about payday loans
The main advantage of a fixed-rate payday loan is that you have an exact idea of how much your repayments will be each month. In addition, it makes budgeting more accessible, as you can plan confidently.
However, if your circumstances change and your income or expenses increase or decrease, this may affect how much you can afford to borrow. To avoid such situations and be entirely informed, here are some facts about payday loans:
Payday loans are unsecured
Payday loans are unsecured, meaning they do not require any collateral. In these cases, if you fail to make payments on time or default ultimately, then there is no additional protection for the lender.
However, there are authorisations by the government that grants the lender certain permissions to recover their monies.
You can get a payday loan without a bank account
Although this does not apply all the time, in some cases, you can get an average payday loan without opening an account at the bank issuing the loan.
Many banks and lending platforms however require that you have your account before they give you a personal loan.
Some payday lenders offer their services to anyone with a job and regular income. When you apply for a payday loan, the lender will check your credit rating through credit bureaus and then decide whether or not to approve you for the amount of money they’re willing to lend.
Payday loans are available to those who work full-time
That is why one of the requirements for a payday loan is your proof of income.
Payday cash loans are only available to those who work full-time jobs or who run their businesses. You can’t get a payday loan if you’re unemployed.
To qualify for a payday loan, you must be employed and have been working for at least two months before applying.
Payday loans may come with high-interest rates
Depending on where you look payday loans attract higher interest rates. This is largely due to the fact that they are unsecured.
Some payday lenders may charge high-interest rates and fees for these loans. If you can’t afford to repay payday loans on time, it may cost you more than just the interest rate on the loan itself.
The fees associated with late payments can add up quickly, making it even more expensive for you in the long run if you have trouble repaying your debt on time.
You can get a payday loan with bad credit
Although most lenders won’t approve borrowers with poor credit scores, getting a payday loan with bad credit is possible if you know where to look.
First, you’ll need to find a lender that offers installment loans. You’ll also need to focus on payday lenders who offer flexible repayment options so that you can pay off your loan as quickly as possible without incurring late fees and other penalties.
How much is payday loan interest?
As stated, payday loans are very expensive compared to other ways of borrowing money.
Due to the activities of lending apps and fintech companies, Nigerian commercial banks are equally launching quick and accessible payday loan platforms.
Some banks are known to offer easy and fast loans to their customers without collateral and with a very low-interest rate as their trademark.
With no hidden charges, banks may charge an interest rate of 1.33% per month, making payday loans a very cheap and competitive loan facility.
Is it advisable to take a payday loan?
Most payday lenders are known to offer up to 70% of your income. While this may appear enticing, if you are truly not in need of a loan, it is better to avoid payday loans.
Payday loans are great for a quick fix, however, it is not advisable to make it a habit. They should not be a go-to solution for ongoing debts or recurring bills.
Failing to do so might plunge you into a cycle of debt that may be difficult to come out from.